Community Health Systems officials say a lawsuit filed by Tenet Healthcare that claims CHS overbilled Medicare by $280 billion from 2006-2009 is 'baseless' and shows Tenet is engaged in a 'scorched earth' defense of CHS' hostile takeover bid launched in early December.
The lawsuit alleges that Community Health systematically billed cases as higher paying inpatient admissions that could have been billed as lower paying outpatient observations and that Community Health's observation rates were less than half the national average. Tenet officials said the discovery was made as a result of research conducted in response to CHS' $3.3 billion hostile takeover bid.
CHS officials say the lawsuit and findings are just another ploy by Tenet as part of an entrenchment strategy aimed at fending off the takeover.
"The bottom line is that these self-serving allegations are an attempt by Tenet's management and board to continue their entrenchment strategy and to distract Tenet shareholders from CHS' pending offer," said a statement from Community Health Systems. "Its actions today prove that Tenet has adopted a 'scorched earth' defense without regard for the best interests of shareholders."
Tenet contends that the lawsuit, which seeks full disclosure of CHS' admissions practices, is necessary for Tenet shareholders to fairly evaluate the CHS bid. In its takeover bid, CHS is offering $6 per share of Tenet stock to be paid in a $5 cash payment and $1 in Community Health stock.
If the allegations are true, "unwinding the strategy will materially reduce admissions, revenues, profits and cash flows going forward," Tenet management noted. This would both materially affect the value of CHS stock and could also make it more difficult for CHS to finance the cash portion of the offer.
Community Health's stock, which absorbed nearly a 40 percent drop on Monday when news of the story broke, has recovered some today, trading at $28.30 at press time, but that is still 30 percent below its closing price last Friday. Tenet, which has been trading well over $7, has also recoverd from a lesser jolt to trade at $6.60 in mid-morning trading, still significantly above CHS' bid.
Opinion in the investment community on the implications of the lawsuit are mixed.
"Although THC has collected a lot of an interesting data indicating that (CHS) has less observation patients than its peers, we don't believe the company has proved (CHS) has admitted patients it shouldn't have (although it is inferred)," said Jason Gurda, a healthcare services analyst with Leerink Swan.
That said, CHS is likely to come under increased scrutiny from the Office of the Inspector General and possibly even the Department of Justice. Tenet noted that using its projection of $280 million in overbilling to Medicare, CHS has potentially exposed itself to $1 billion in fines if they are found guilty of overbilling.
"Because (Tenet's) data don't prove that patients were admitted who shouldn't have been, we believe (CHS') likely worst case exposure is a large civil fine and a new compliance program, without the admission of guilt," said Jason Gurda of Leerink Swann.
Sheryl Skolnick, a principal with CRT Capital, sees the situation differently. "We find (Tenet's) allegations and analysis well-reasoned and compelling and (CHS') response as wholly insufficient," she said in an investment note released Tuesday.
Skolnick argues that as a result of the lawsuit, CHS must be more active in providing information and it must act quickly.
"It is no longer enough for (CHS) to merely assert its position as it has since it started its hostile bid, in our view," she said. "We believe that (CHS) must respond to the suit, respond to shareholders and most importantly, proactively make its case to Medicare."